The law stipulates the right of representatives of owners of debtor enterprises to appeal against the claims of creditors, as well as the right of the debtors, owners of debtor enter prises, and any third parties on the condition of approval on the part of bankruptcy com missioners, to stop bankruptcy proceedings at any stage by repaying the debts of debtor enterprises.

4. Introduction of a new procedure financial rehabilitation. In certain situations, this procedure should permit the founders (partners) of the debtor to keep control over the fate of the enterprises even in the case there are initiated bankruptcy proceedings. There were enhanced mechanisms of support of the debtor’s business, in particular, there was envis aged the option to revert bankruptcy proceedings to external management in the case there is a real opportunity of restoration of solvency and additional issue of stocks during external management on condition of approval of such an issue by the debtor’s owner.

5. Protection of bona fide participants of bankruptcy proceedings from mala fide ac tions taken by third parties. There are envisaged the following innovations: it is prohibited to initiate new bankruptcy proceedings against the debtor within 3 months since the date of conclusion of the amicable settlement; there is introduced the possibility to appeal against determinations issued in the course of bankruptcy proceedings basing on the re sults of disputes between the parties participating in the case; there is improved the pro cedure governing the sale of debtors’ properties; there is stipulated that in the cases where the balance sheet value of property confirmed by an independent appraiser ex ceeds a certain level, the tender for the sale of the debtor’s property should be public on the mandatory basis.

6. Enhancement of efficiency of control over the actions of bankruptcy commission ers. One of the most important objectives is the introduction of efficient supervision over the actions of bankruptcy commissioners due to the abolition of licensing of such activities.

The whole system of responsibility and supervision of bankruptcy commissioners’ activi ties is radically changed. The supervisory functions with respect to bankruptcy commis sioners were transferred from the state as represented by FSFR to non for profit self regulating organizations (SRO). The law vests with SRO the right to take disciplinary meas ures with respect to their members, including the expulsion from the number of members of SRO, and to submit to arbitration courts applications to suspend their members from participation in bankruptcy proceedings in the capacity of arbitration commissioners. The law introduces property qualification with respect to bankruptcy commissioners – the amount of the lump sum fee each bankruptcy commissioner should pay to the compensa tory fund of the SRO the commissioner joins. The law stipulates that the civil liability of bankruptcy commissioners should be on mandatory basis insured by the insurance com panies accredited by SRO.

7. Setting of specifics of bankruptcy of certain debtors’ categories in one law. The law envisages certain specifics of bankruptcy for organizations related to defense industry and subjects of natural monopolies. The law has abolished the “inability to pay” criterion RUSSIAN ECONOMY in trends and outlooks applicable to subjects of natural monopolies; however, it does not set forth any special in solvency criteria with respect to organizations of the military industrial complex, subjects of natural monopolies, and other organizations of serious social, economic, and strategic im portance. Therefore, the latter will be subject of the same criteria of insolvency based on the “inability to pay” principle as other categories of debtors. The specific feature here is the external indications of insolvency: bankruptcy proceedings with respect to such or ganizations should be initiated if their indebtedness makes Rub. 500 thousand delayed by 6 months. Besides, as concerns strategic enterprises, the law grants the state the right to suspend the sales of property for a certain period in order to elaborate proposals aimed at the restoration of such organizations’ solvency, including the switching to the procedures of financial rehabilitation.

8. Constrains on too broad use of bankruptcy proceedings as concerns liquidation of absent debtors. The law stipulates that bankruptcy procedures with respect to absent debtors should be applied only in the case the budget has available the respective funds.

In 2004, the alignment of forces of the respective authorities engaged in the regula tion and practical enforcement of bankruptcy procedures principally changed80. Accord ingly, the problem of further division (coordination) of the functions performed by different authorities in the sphere of insolvency became more urgent. The distribution of key func tions and powers concerning the regulation an practical implementation of the institution of bankruptcy among executive authorities is presented in Table 581. In 2004 and 2005, there were observed two most pronounced trends: first, the trend towards a reduction in the number of “poles” of regulation in this sphere after their “atomization” in the course of the liquidation of the Federal Service of Financial Rehabilitation (FSFR) 82, and, second, to wards an enhancement of Federal Tax Service (FTS) powers.

Table Modification of functions and powers of executive authorities in the sphere of insolvency in 2004 and Functions 01.01.2004 01.01.Regulation in the sphere of RF Ministry of Economic Development FSFR of Russia insolvency of enterprises and Trade FTS of Russia As concerns debtors of Category A – The procedures governing the process the RF Government, the Chairman of Decisions about submission of taking of decisions with respect to the RF Government, or the Deputy of bankruptcy claims bankruptcy claims referring to the Chairman of the RF Government act against debtors debtor included in the list of strategic ing on instructions of the Chairman of enterprises and organizations is set the RF Government, forth by the RF Ministry of Economic Decree of the RF President No. 314 of March 9, 2004, “On the system and structure of federal executive authorities” in particular envisaged the liquidation of FSFR and the RF State Property Ministry, creation of the Federal Agency for Manage ment of Federal Property (FAMFP) and transfer of certain FSRF functions to FAMFP, transfer of the functions related to the approval of regulatory legal acts on the issues being in the FSFR competence to the RF Ministry of Economic Development and Trade, reorganization of the RF Tax Ministry in the Federal Tax Service, transfer of the FSFR functions relating to the representation of the interests of the Russian Federation with respect to creditors in bankruptcy proceedings to the Federal Tax Service.

Prepared by M. G. Kuzyk.

In a certain sense, this situation may be interpreted in terms of the theorem on the minimal production of entropy advanced by I. Prigozhin (1945), according to which any system always tend to a “stationary state corresponding to the minimal pro duction of entropy compensating the impact of external relationships producing negative entropy.” (For details see, for in stance, Alekseyev N. S. Teoriya upravleniya “Epokhi bez zakonomernostei” (Theory of management in the “Age without regularities”) // Menedzhment v Rossii i za rubezhom. 2000. No. 3). In other words, each system (in this case the system of regulation of the institution of bankruptcy) in accordance with the principle of internal resource conservation tends to the state of equilibrium with the maximal level of disorganization permitted by external destructive impacts, to which the system has to withstand.

Section 4.

Institutional and Macroeconomic Challenges As concerns debtors of Category B – Development and Trade FSFR of Russia on the basis of deci sions taken by the interdepartmental commission Choice of SRO in the case FTS of Russia of submission of bank In accordance with the procedures set FSFR of Russia ruptcy claims against debt forth by the RF Ministry of Economic ors Development and Trade FTS of Russia In accordance with the procedures set FSFR of Russia forth by the RF Ministry of Economic As concerns the choice of bankruptcy Development and Trade Voting at meetings of credi proceedings – taking into account As concerns the choice of bankruptcy tors the opinion the respective executive proceedings – taking into account the authority of the RF subject and the opinion the respective executive au local government thority of the RF subject and the local government Execution of the powers of the owner of the debtor’s property (as concerns fed Federal Agency for Management of RF State Property Ministry eral state unitary enter Federal Property (FAMFP) prises (FSUE) in the course of bankruptcy proceedings Federal Registration Service (Rosregis Supervision of SRO activi RF Ministry of Justice * tratsiya) ties * By 2005, the RF Ministry of Justice retained only rather modest powers as concerns the formation of commis sions for organization and carrying out of theoretical examinations in accordance with the unified training pro gram for bankruptcy commissioners.

The approval of a new law on bankruptcy, which has significantly modified the institu tion of insolvency, determined the necessity to revise the regulatory bylaws in this sphere.

In 2002 through 2005, different state authorities issued more than 20 bylaws pertaining to the sphere of bankruptcy, however, the “tuning” of the new legislative mechanisms contin ues. At the same time, after the enactment of the new bankruptcy law there is required a period for formation of the respective infrastructure and its adaptation to new legislative regulations. It is also apparent that such “tuning” requires to take into account the specif ics of real demand for institutional innovations, which would be adequate to the existing economic realities83. However, the practices of 2003 and 2004 indicate significant changes in the dynamics of respective cases, appearance of new important trends in the sphere of bankruptcy, revision of the significance of certain problems observed in the preceding pe riod.

4.3.2. Practical implementation of the third law on bankruptcy (2003 and 2004) Basing on the results of implementation of bankruptcy proceedings in 2003, there may be made certain preliminary remarks with respect to the problems related to the en forcement of the new law on insolvency. Naturally, due to the lack of formed court prac tices of enforcement of the provisions of the third law on insolvency, it may be considered that its potential is far from being exhausted; however, even now it is possible to form a judgment on the most noticeable miscalculations relating to the evaluation of the situation See: Golikova V., Dolgopyatova T., Kuznetsov B., Simachev Yu. Spros na pravo v oblasti korporativnogo upravleniya: em piricheskiye svidetelstva (Demand for corporate law: empirical evidence). Working papers series: independent economic analysis. No. 148. M.: MONF, 2003; Simachev Yu. Institut nesostoyatelnosti v Rossii: spros, osnovnye tendetsii i problemy razvitiyza (Institution of insolvency in Russia: demand, trends, and major problems) // Voprosy ekonomiki. 2003. No. 4.

RUSSIAN ECONOMY in trends and outlooks in the sphere of enforcement of insolvency procedures and certain flaws in the provisions of the new law. Certain general trends are presented in Table 684.

In 2003, the scale of application of bankruptcy proceedings sharply declined: the number of bankruptcy claims against debtors declined 7.5 times from 106647 cases in 2002 to 14277 cases in 2003 (see Fig. 2). Even a more dramatic decline was observed with respect to the claims resulted in initiation of bankruptcy proceedings – the number of such claims decreased 9.8 times from 94531 in 2002 to 9695 in 2003 (see Fig. 3).

Total number of claims Number of claims without those 20000 against absent 12781 debtors 12367 1998 1999 2000 2001 2002 Fig. 2. The dynamics of bankruptcy claims against debtors At the moment the work with this material was completed, the official statistics for year 2004 (RF Supreme Arbitration Court, etc) was not available.

Section 4.

Institutional and Macroeconomic Challenges The fact that tax authorities have practically stopped to accept bankruptcy claims against absent debtors accounts for about 85 per cent of this radical reduction in the number of bankruptcy claims. In 2003, there were registered only 2129 claims against ab sent debtors as compared with 81251 claims registered in 2002. It is an illustrative demon stration of the enforcement of the provisions of the third law on insolvency, which stipu lates that bankruptcy procedures with respect to absent debtors should be applied only in the case budgets have available the respective funds; however, as it should be expected, no such funds were provided in the budget for year 2003.

On the whole, this result may be positively appraised, since it reduced the irrational burden on the system of arbitration courts. However, the problem of absent debtors has not been resolved by a legislation envisaging methods other than bankruptcy procedures.

However, the problem of absent debtors per se has not been settled yet in the framework of legislation other than that concerning bankruptcies. Accordingly, the top officials of the RF Supreme Arbitration Court evaluate the nearest perspectives as rather pessimistic pre supposing that in the near future there may be resumed actions aimed at the liquidation of about 1.5 million of actually absent enterprises and organizations by the application of simplified bankruptcy proceedings85.